Botswana Metals Limited (ASX:BML) announced a loss of -$1.06M in its most recent earnings update. Although some investors expected this, their belief in the path to profitability for BML may be wavering. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that BML is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined BML’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. View our latest analysis for Botswana Metals
What is cash burn?
BML currently has $0.08M in the bank, with negative cash flows from operations of -$0.72M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. The measure of how fast BML goes through its cash reserves over time is called the cash burn rate. The riskiest factor facing investors of BML is the potential for the company to run out of cash without the ability to raise more money, i.e. BML goes out of business. Furthermore, it is not uncommon to find loss-makers in an industry such as metals and mining. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will BML need to raise more cash?
BML has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In BML’s case, its opex fell by -7.24% last year, which may signal the company moving towards a more sustainable level of expenses. However, even with declining costs, the current level of cash is not enough to sustain BML’s operations and the company may need to come to market to raise more capital within the year. Even though this is analysis is fairly basic, and BML still can cut its overhead further, or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
What this means for you:
Are you a shareholder? If BML makes up a reasonable portion of your portfolio, it’s always wise to consider cushioning your holdings with less risky, profitable stocks. The outcome of this analysis should shed some light on BML’s cash situation and the risks you may or may not have been aware of as a shareholder of the company. Keep in mind that opex is only one side of the coin. I recommend also looking at BML’s revenues in order to forecast when the company will become breakeven and start producing profits for shareholders.
Are you a potential investor? Loss-making companies are a risky play, even those that are reducing their opex over time. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that even if BML were to continue to shrink its opex at this rate, it will not be able to sustain its operations given the current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should BML come to market to fund its growth.
An experienced management team on the helm increases our confidence in the business – take a look at who sits on BML’s board and the CEO’s back ground and experience here. If risky loss-making stocks do not appeal to you, see my list of highly profitable companies to add to your portfolio..
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